This was a special case under ss 14 and 21(1) of the Arbitration Act 1950 between the appellants as disponent owners and the respondents as charterers of the vessel Saxon Star. The respondents chartered the vessel, which was surveyed and repaired in Baltimore and crewed in New York, and made a non-carrying voyage to Curacao to collect its first cargo. During the voyage, the vessel's machinery was seriously damaged, and it was towed to San Juan for repairs before proceeding to Curacao. On its voyage to Brazil, its boilers leaked, and it also had machinery trouble on voyages from Monte Video and Curacao. The umpire found that the vessel was unseaworthy, was not maintained in a seaworthy condition, and that the owners failed to exercise due diligence to make it seaworthy. The umpire found the charterers not liable for damages for breach of contract. Devlin J and the Court of Appeal upheld the interim award and answered some legal questions.

The owners could only be liable in damages if not protected by cl 52 of the charterparty, which incorporated a paramount clause. The paramount clause stated that the bill of lading should have effect subject to the provisions of the Carriage of Goods by Sea Act of the United States (the Act), approved April 16, 1936.

Held (Lords Morton of Henryton and Reid dissenting on questions 2(a) and 2(b)): Appeal allowed.

Viscount Simonds: Outlined the relevant legal questions as follows:

1) Does the Act affect the rights and liabilities of the parties under the charterparty?
2) If yes, do any material provisions of the Act affect the rights and liabilities of the parties in connection with (a) non-cargo carrying voyages; (b) cargo carrying voyages other than those to or from ports in the USA?
3) Do the words 'loss or damage' in s 4(1) and/or s 4(2) of the Act relate only to physical loss of or damage to the goods?

On question 1, it was argued that the appellants could not rely on the paramount clause as it was insensible. It opened with the words 'This bill of lading' and it purported to incorporate an Act which itself provided that it shall not be applied to charterparties. Viscount Simonds found that the parties had a common intention to incorporate the paramount clause, even though it purported to incorporate the Act, which provided that it shall not apply to charterparties. The opening words 'This bill of lading' were an example of the maxim falsa demonstratio non nocet cum de corpore constat (a false description does not vitiate, provided the thing intended has been sufficiently described).

On question 2(a), Viscount Simonds found that the material provisions of the Act, setting out the owners' obligations and immunities (including ss 2, 3, and 4), applied to the whole period during which the vessel was under charter. This did not place an unreasonable burden on the owners, as s 3(1) of the Act did not require the owners to exercise due diligence to make the holds, refrigerating and cooling chambers fit and safe for the reception, carriage and preservation of goods when it was leaving in ballast and before its arrival at the first port of loading. Viscount Simonds rejected the argument that non-carrying voyages were excluded from the scope of the Act because it only applied to obligations, liabilities, rights and immunities in respect of goods carried under bills of lading.

On question 2(b), Viscount Simonds found that the contract was of worldwide scope, and there was no reason to import a geographical restriction into the contract. This would make no commercial sense.

On question 3, the charterers had claimed damages owing to the delay caused by the unseaworthiness of the vessel, which resulted in their performing fewer voyages than they otherwise would have done in the 18-month period. It was held that the words 'loss or damage' in ss 4(1) and 4(2) of the Act were not expressly limited to physical loss or damage to the goods. Section 2 of the Act placed no constraint to put a narrower meaning on the words.

Lord Morton of Henryton: On question 1, Lord Morton held that the paramount clause was incorporated into the charterparty and corrected the opening words of the cl to read 'This charterparty shall have effect subject to …'. He also rejected the provision in s 5 of the Act as meaningless.

On question 2(a), Lord Morton held that the provisions of the Act did not apply to non-carrying voyages. The provision upon which the owners relied to exempt themselves from liability for the unseaworthiness of the vessel was s 4(1):

Neither the carrier nor the ship shall be liable for loss or damage arising or resulting from unseaworthiness unless caused by want of due diligence on the part of the carrier to make the ship seaworthy, and to secure that the ship is properly manned, equipped, and supplied, and to make the holds, refrigerating and cool chambers, and all other parts of the ship in which goods are carried fit and safe for their reception, carriage, and preservation in accordance with the provisions of paragraph (1) section 3. Whenever loss or damage has resulted from unseaworthiness, the burden of proving the exercise of due diligence shall be on the carrier or other persons claiming exemption under this section.

As well as s 4(2)(a): 'neither the carrier nor the ship shall be responsible for loss or damage arising from (a) Act, neglect, or default of the master, mariner, pilot, or servants of the carrier in the navigation or in the management of the ship…'.

Lord Morton explained that the above provisions were incorporated into the charterparty by virtue of s 2 of the Act, which was made applicable by the paramount clause. Section 2 provides: 'Subject to the provisions of Article 6, under every contract of carriage of goods by sea the carrier, in relation to the loading, handling, stowage, carriage, custody, care and discharge of such goods, shall be subject to the responsibilities and liabilities, and entitled to the rights and immunities hereinafter set forth.'

The rights and immunities under s 2 applied to a contract of carriage, which the charterparty was, in relation to a period of time from when the goods are loaded on to the time when they are discharged from the ship. This period of time was determined from the definition of 'carriage of goods' as set out in s 1(e) which states '''Carriage of goods'' covers the period from the time when the goods are loaded on to the time they are discharged from the ship'. Moreover, s 2 specified that it is only 'under every contract of carriage of goods by sea', and 'in relation to the loading, handling, stowage, carriage, custody, care and discharge of goods' that the rights and immunities, including those under s 4, would apply to the carrier. As such, the non-carrying voyage made by the Saxon Star was excluded from the scope of the Act.

On question 2(b), Lord Morton held that s 13 of the Act intended to limit the application of the Act to contracts of carriage of goods to and from ports of the US. The parties by their choice incorporated the Act instead of the International Convention for the Unification of Certain Rules of Law relating to Bills of Lading 1924 (the Hague Rules), and therefore were obliged to take the provisions as they found them, unless their effect would be insensible in the charterparty. Even if the words in the Act cut down the effect of the immunity to cover only voyages to and from US ports, they could not be struck out or changed as that would be forming a new contract on behalf of the parties. The effect of answering questions 2(a) and (b) in the negative rendered consideration of question 3 irrelevant.

Lord Reid: As to question 1, cl 52 clearly indicated that the paramount clause was to be incorporated into the charterparty, and that the words 'This bill of lading' should be read as 'This charterparty'. Section 5 of the Act must be rejected as insensible. He also rejected the contention by the appellants in relation to questions 2(a) and (b), that the rights, liabilities, and immunities which were originally intended for bills of lading but now incorporated into the charterparty, should not import the limitations from their original context in the Act. This contention, if accepted, would make the provisions applicable to voyages that were neither to nor from a port in the US and to non-cargo carrying voyages, to which these provisions would not have applied in their original setting in the Act. Lord Reid held that the express provision of the paramount clause was incapable of bearing this interpretation, and giving effect to this contention would contradict what the parties said in their contract and make a new contract for them. The words of the paramount clause only sufficiently applied the Hague Rules to cargo-carrying voyages to or from the US.

Lord Keith of Avonholm: Agreed that the Act was incorporated into the charterparty by the paramount clause. He stated that the words 'This bill of lading' in the paramount clause must be read as 'This charterparty'. Furthermore, s 5 of the Act must be disregarded.

Lord Keith noted that the Act was intended to apply only to contracts of carriage of goods covered by a bill of lading or a similar document of title. Therefore, it was now necessary to construe it as far as possible with reference to a charterparty and not a bill of lading. This involved the deletion of insensible or inconsistent terms: Hamilton & Co v Mackie & Sons 5 TLR 677; or reading in as much of the 'incorporated document as is not inconsistent with the subject matter of the incorporating document': TW Thomas & Co Ltd v Portsea Steamship Co Ltd [1912] AC 1. It also involved interpreting 'contract of carriage' as meaning a contract between a carrier and a charterer and not between a carrier and a shipper.

Lord Keith held that ss 3(1) and s 4(1) could be interpreted to apply to an owner and charterer. The provisions could apply to a ballast or non-cargo carrying voyage, and they did not only apply to voyages to or from a US port. On the first point, Lord Keith reasoned that the Act was initially limited to cargo-carrying voyages because it exclusively dealt with contracts of carriage under bills of lading. However, the Act was now being applied to a charterparty, which is a contract for the purpose of carriage of goods by sea. A voyage in ballast is all part and parcel of and incidental to the purpose of a charterparty. Moreover, if a chartered ship travels to its port of loading it is 'engaged in a voyage relating to the carriage of goods though it is not actually carrying goods'. An interpretation contrary to this and excluding the carrier from the rights and immunities under s 3 and 4 would maintain that the Act only applied to contracts for the carriage of goods by sea under bills of lading.

Section 2 also did not assist in advancing the argument for the exclusion of ballast voyages, as it could be interpreted to mean that a non-carrying voyage under a charterparty was a voyage under the contract 'in relation to the loading, handling, stowage, carriage … of goods'. Section 1(e) of the Act, which provides that the rights and immunities under s 2 apply to the period of time from when the goods are loaded to the time when they are discharged, has no meaning in the context of a charterparty. This is because it covers a much greater scope of time and must be rejected as inconsistent with the purpose of the charterparty.

Moreover, s 3(1)(c) requires that the carrier, before and at the beginning of the voyage, exercises due diligence to make the ship fit and safe for the carriage and preservation of the goods. Lord Keith held that this provision could apply as equally under a charterparty contract as it would under a contract for the carriage of goods under a bill of lading. If a ship under a charterparty has not fulfilled the obligation in s 3(1) before it sails for its port of loading, it would have to do so before taking on cargo at the port of loading, and on each voyage agreed under the charterparty on which it carries goods.

On question 2(b), the words in the enacting section of the statute and s 13 of the Act limiting immunity to voyages to or from the US ports had no relevance to charterparties. There were good reasons why the US legislature limited the application of the Act to goods carried under a bill of lading to or from US ports, but these reasons are inappropriate when the Act is introduced into charterparties covering a very wide range of ports outside the US.

On question 3, the term 'loss or damage' in ss 4(1) and 4(2) was not limited to physical loss. Even where the Act only applied to goods carried under bills of lading, the loss or damage was not limited to physical loss of or damage to goods: GH Renton Co Ltd v Palmyra Trading Corp of Panama [1957] AC 149 (CMI2113). Furthermore, s 3(8) illustrates that the loss or damage contemplated in the Act is 'loss or damage to, or in connection with, goods'. Therefore, it was held that the subject matter of the contract, in this case, was voyages, and loss of voyages is naturally encompassed by the words 'loss or damage'.

Lord Somerville of Harrow: As to question 1, the opening words of the paramount clause should be read as if they were: 'This charterparty', and s 5 of the Act is to be disregarded. The provisions of the Act are to be incorporated into the charterparty as far as possible.

Holding that the Act applied to all non-carrying and cargo-carrying voyages, Lord Harrow reasoned that the effect of the paramount clause was to reduce the shipowners’ liability at common law as well under the document to which the paramount clause was incorporated. It would be foolish if the shipowner was subject to greater liability on a non-carrying voyage than on a carrying voyage. Lord Reid found that it was natural for shipowners and cargo owners to intend the obligations and immunities to apply over the whole contractual period of the charterparty.

In relation to question 2(b), it was concluded that the Act was being incorporated into a contract to which it was never intended to apply - a charterparty for shipment to or from a wide range of ports, possibly never including a US port. Therefore, one must prima facie reject 'the limitations which are imposed in these various Acts necessitated by the limits of the legislative jurisdiction of the country concerned'.

It was also held that the loss or damage referred to in the Act was not limited to physical damage to the goods. The loss or damage must arise 'in relation to the loading, handling, stowage, carriage, custody, care, and discharge of such goods'.